Prior research suggests that economic booms are associated with overconfidence and risk-taking. In a new paper, Emily Bianchi, assistant professor of organization & management, and coauthor Aharon Mohliver (London Business School) build on that research by showing that prosperous times are also associated with more ethical lapses. The authors examined whether CEOs were more likely to backdate their stock options during prosperous economic times. Backdating stock options was relatively common during the late 1990s to early 2000s. It was also unethical. A backdating CEO would receive a stock option grant on one day but report that the options were assigned on an earlier date when the stock price was lower. This would allow the CEO to realize greater gains when he or she sold the stock. Also, it required lying to the SEC and came at the expense of company profits. To test their theory, Bianchi and Mohliver looked at the backdating patterns of 2,139 CEOs of US publically traded companies between 1996 and 2005. They found that CEOs were more likely to backdate in good economic times. They also found that “CEOs who began their careers in prosperous times were more likely to backdate stock option grants later in their careers.” The findings indicate that economic prosperity influences the likelihood of corporate misconduct.
Emily Bianchi Goizueta Foundation Term Associate Professor of Organization & Management